BOC Hong Kong Undervalued on Better Outlook for NIM in Medium Term

Ahead of the first-half results, we raise our fair value estimate for narrow-moat-rated BOC Hong Kong to HKD 36 per share from HKD 34. While there is no change in our view that net interest margin will decline on a full-year basis in 2021, we lift our medium-term net interest margin assumption to factor in market expectations of rising interest rates at the end of 2022. This should start flowing through to net interest margin in 2023. The magnitude of the increase is dependent on the level of system liquidity, competition on deposits, and also pricing on the asset side. Our 2021 dividend forecast of HKD 1.26 per share is reaffirmed, which represents a dividend yield of 4.9% at the current share price of HKD 25.75. Our dividend forecast assumes a payout ratio of 50%, at the midpoint of the bank’s guidance of 40%-60%. With a strong capital position and more certainty on the current COVID-19 situation, there may be some upside in the bank opting for a higher dividend payout as earnings are expected to be flat in 2021.